Why Do I Need To Plan My Estate When The Estate Tax Exclusion Is Up To $5,000,000!?

Why Do I Need To Plan My Estate When The Estate Tax Exclusion Is Up To $5,000,000!?

I talk to a lot of people who stopped worrying about planning their estates when the 2011 threat of the $1,000,000 limit of assets that could transfer to their heirs without estate tax jumped to an unbelievable $5,000,000 per person! The legislature extended a tax bill already on the books for two more years and increased the exclusion amount from $3,500,000 to $5,000,000. At a $1,000,000 limit, in California, it is fairly easy to see exceeding that amount when one considers the value of your house and retirement assets and planning became critical. Now, it seems people have relaxed and figure, I suppose, that unless they are any where near five million dollars in their estates, they have nothing to worry about. Think again.

First, that $5,000,000 amount is only through December 31, 2012, which is next year. Second, it has nothing to do what happens to your body, only your money. Third, the new exclusion amount does nothing for your children should a Guardian be needed. There is much more to planning your life and estate than just how much money you have. Let’s start with a very basic background on the Estate Tax in the United States.

The estate tax is one part of the Unified Gift and Estate Tax system in the United States. It is a tax on the transfer of the “taxable estate” at death of any assets by any means, whether via a will, according to the state laws of intestacy, a transfer of property from a trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries. Transfers during life are taxed under the gift tax system and it imposes a tax to prevent avoidance of the estate tax by those who would give away his/her estate prior to death. There are some transfers to which there is a 100% deduction for anything going to a spouse or to a qualifying charitable institution but that is beyond the scope of this article.

That being said, let’s get back to the list of three significant reasons estate planning is still critical and look at the first one. The $5,000,000 exclusion amount is only through the end of next year. After that, unless the legislature can agree to something else, because it was merely an extension of the prior law, it will “sunset” or expire and we will be back to an exclusion amount of $1,000,000. So this seemingly bottomless glass of tax benefits is a temporary one indeed. If you can be sure that you will die before the end of next year, you may indeed arguably not have any need for tax planning if your estate is less than $5,000,000. This covers your money concerns but does not cover what happens to you, to your body and health. Let’s move to the second reason estate planning is still so important.

Assume a car accident or stroke and then think about what would happen to your assets and family while you are recovering. Typically, your income would be cut off or taper off once sick leave and vacation are used but the bills are still due and you are still recovering. Who can pay your bills, collect your mail, deposit checks and do your banking? If you are in the hospital, who is going to pay the insurance to be sure you still have coverage? What happens if you are unable to make your own decisions about your health care? There are two roads to travel here, the financial one and the physical one. Let’s take them one at a time.

Assume you are unable to pay your bills and take care of your finances. You need to have a Power of Attorney for Asset Management to appoint an “Agent” to act for you. These can be live or springing. “Live” means currently effective and it can be used from the moment you finish signing it. “Springing” means the POA is only effective ONLY IF you become unable to manage your affairs by an ascertainable process you list in the document. So whichever one you have, it allows a spouse, friend, family member or whomever to start acting on your behalf. It may be “durable” if it is specifically stated to remain effective even on your incapacity. From personal experience as an Agent for a friend, I can tell you that had he NOT had an Agent, when he was hospitalized for months, his insurance policy would have been cut off for nonpayment. Because I was the Agent and aware of what needed doing because we had done the right planning, I was able to pay his insurance, mortgage, Daughter’s living expenses at college and the rest of his bills until he could do it again.

Now, let us look at the physical side of a power of attorney. We all need to have an Advance Directive without any question. This is a Durable Power of Attorney for Health Care but they shortened the name. This allows you to appoint an Agent to make decisions for you in the event you are not able to do so. This does not become effective for your flu or broken bone. This is if you cannot make your own choices and when the doctor determines this, the Agent comes into play. The Agent then signs authorizations for treatment or whatever and makes decisions based on what you told him or her and what is in the document. These are temporary instructions [think short term or induced coma] and end of life instructions. This allows you to say “I want heroic measures” or “do not resuscitate” or whatever your choices are. The document also allows you to appoint a Conservator should one be needed for you. It is durable and is designed to last for years. It is critical for each and every one of us and has nothing to do with how much money we have. It is so we don’t end up like Terri Schiavo in Florida with everyone fighting over what they thought she really wanted.

The third reason you need estate planning, irrespective of the size or amount of your estate, is if you have children or pets you want to provide for when you die. Start with children and assume you have done nothing. If you are a single parent or your spouse has predeceased you or perhaps died in the same accident, who do you want to raise your kids? Your parents may be unavailable, uninterested or dead too. The Sister who lives close might be a dream with the kids but a money disaster, unable to keep her own checking account balanced. The Aunt who might step in may be someone you dislike or don’t respect or don’t want anywhere near your children. An estate plan would set out your preferences for whomever it is you want to raise your children if you are gone. Without compelling reasons not to do so, the Court will appoint this person Guardian of your children. You can choose who that will be OR you can leave it to the wisdom of the State of California.

We, who have them and can’t imagine life without them, all love our pets. If you die, have you made a plan for the care of your pets? Do you really want to think of them taken to the pound for lack of a plan. Choosing [and discussing with the person first] a pet guardian is very important too. You can set up a fund from your estate to help pay the cost of the pets’ care in a Pet Trust or, at a minimum, just make instructions.

In looking at all of this, you can see why you still really need to do your estate planning. The amount of money you can leave and what you do with it is certainly important but more important than that are setting up a system where you have:

  1. an Agent to take care of your assets;
  2. an Agent to make health care decisions if you cannot and be a Conservator if needed; and
  3. a Guardian for your children and/or pets.

Consider all of this and then give me a call!

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